Schooled in Public Service & Municipal Bankruptcy

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eBlog, 12/08/16

Good Morning! In this a.m.’s eBlog, we salute the soon to be retiring Emergency Manager of the Detroit Public Schools, the exceptional former U.S. Bankruptcy Judge Steven Rhodes, who presided over the largest municipal bankruptcy in the nation’s history before accepting the grueling challenge to be the emergency manager of the near bankrupt Detroit public schools system.

Yes We Can. The extraordinary public servant and electric rhythm guitar playing retired U.S. Bankruptcy Judge Steven Rhodes, currently the outgoing (yes, a pun) Emergency Manager of the Detroit Public Schools Community District (DPSCD)said an investigation by the school district’s inspector general could produce more criminal charges in the district—and, likely, more fiscal pain for the city. He had hired Inspector General Bernadette Kakooza last April, in the midst of an ongoing federal investigation of a $2.7 million kickback scheme with a contractor involving 13 school administrators who are no longer employed by the school district, although he was careful not to address the specifics in speaking to the Detroit News this week about what potential wrongdoing there might be after testifying before a House committee on the District’s progress since the legislature last June enacted a $617 million financial rescue of the school system; however, Judge Rhodes noted, referring to Ms. Kakooza: “She does have several matters under investigation at the present time that may result in further criminal investigations and charges.” Those charges relate to new cases of fraud the DPSCD inspector general had outlined in a report, including a payroll error resulting in an employee being overpaid by $50,000, fraudulent teaching credentials, and missing equipment and public funds. Judge Rhodes did say that the new debt-free Detroit school has developed “much stricter controls” on purchasing in an effort to try to prevent fraud, adding, however: “Still, we understand that there are no financial controls that are foolproof against clever and smart criminals who are intent upon theft and fraud.” His statement came before the Michigan House School Aid Appropriations Subcommittee in what might prove to be one of his last state public appearances as he nears the end of his service to Detroit’s kids on the last day of this month. At the hearing, Judge Rhodes also disclosed for the first time that the school district has paid Michigan’s public pension fund nearly $30 million—money which had been diverted from federal grants to the public school district’s general fund by his predecessors. DPSCD’s past-due pension debt to the Michigan Public School Employee Retirement System stood at $132.6 million as of last November 11th, significantly paid down from $163 million on June 30th, according to the Michigan Office of Retirement Services; nevertheless, it will likely take nearly a decade to fully pay down past arrears. .

For his part, Judge Rhodes said he would be handing over authority of the school district to a newly elected Detroit school board with a projected fund balance of between $40 million and $50 million for the current fiscal year, telling reporters: “The school board is the new control for public education in the city of Detroit.” Rhodes told reporters; albeit, as part of the state’s bailout of the Detroit Public Schools, Detroit’s Financial Review Commission retains veto power over the school board’s spending plans once Judge Rhodes leaves office at the end of the month; Judge Rhodes said the surplus will help the district with cash-flow next summer when there is a projected gap in School Aid payments from the state. His swan song, as it were, comes as the legislature continues to scrutinize the finances and operations of the state’s largest school system. As a parting, if poignant, message, Judge Rhodes advised: “I think DPS just needs to be left alone for a little while to give this academic plan a chance, to give our fresh start a chance and to prove to our city, our region, and our state that we can succeed.”

While the there is separate and distinct governance between Detroit’s municipal and school governance, the two are inextricably linked, because, as we have noted too often (likely), the perceived quality of a municipality or county’s public schools is critical to the interest of parents to move to such a municipality or county–and, ergo–to assessed property values. 

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